Inherited assets under the regime of the community of accrued gains - Part II: Structuring options
In the context of the community of accrued gains, if the development of the assets of spouses differs greatly, then in the event of the death of the wealthier spouse there could be considerable tax consequences. In Part 1 of our report, the civil law and inheritance tax consequences were presented on the basis of a practical example. The following sections highlight the structuring options available in order to reduce the tax burden.
1. Statutory property regime swing
Spouses are able to equalise accrued gains already during their lifetimes - even without a divorce - by switching the statutory property regime. A common structuring model is the ‘statutory property regime swing’.
- The statutory matrimonial property regime of the community of accrued gains will be rescinded via a nuptial agreement (Section 1408 of the Civil Code [Bundesgesetzbuch, BGB]).
- As a result, the equalisation of accrued gains will immediately become due and payable (Section 1378 BGB).
- Subsequently, a new community of accrued gains can be directly agreed again (possibly in the same contract).
The equalisation payment that is triggered in this way means that it is possible to transfer assets free of tax. The equalisation claim in respect of accrued gains is non-taxable.
In the case study (please see Part I of this report at www.pkf.de) the wealthier husband transfers € 700k to the wife in the context of the equalisation of accrued gains. This transfer is tax-exempt and reduces his assets and, in turn, in a subsequent succession case will reduce the taxable estate.
2. Appropriate transfer of the family home
In the context of estate planning within a community of accrued gains, the appropriate transfer of the family home takes on special importance. Suitable ways of structuring this are through a legacy (Section 1939 BGB) as well as a transfer within the scope of a partitioning of the estate (Section 2042 ff.BGB). Both options make it possible to transfer the family home to the surviving spouse, taking into account the tax implications of Section 13(1) no.4b of the Inheritance and Gift Tax Act (Erbschaft- und Schenkungsteuergesetz, ErbStG) and, in doing so, to conserve tax-free allowances.
2.1 Legacy
In the context of inheritance-related structuring, a key distinguishing criterion between spouses relates to the legal classification of a gift as a (simple) legacy or a preferential legacy. A simple legacy (Section 1939 BGB) establishes the contractual claim of the legatee against the heirs; the legatee will not become part of the community of heirs. In the case of a preferential legacy (Section 2150 BGB analogous), the legatee receives a pecuniary benefit in addition to their portion of the inheritance. They would simultaneously be an heir and a beneficiary under the will.
A beneficiary under the will is not an heir. A claim to transfer ownership of the bequeathed object is directed solely against the heirs. Transfer of ownership of a plot of land or a property requires a separate transfer in rem by way of the transfer of title and an entry in the land register. By contrast, a preferential beneficiary under the will is themself a member of the community of heirs and, in this respect, is also subject to proportional liability for the debts of the estate. A preferential legacy represents added value when compared with the regular portion of the estate and - from an economic perspective - it reduces the share of the remaining co-heirs.
This distinction is of great relevance, in particular, in the case of spouses’ wills. If the family home is transferred to the surviving spouse ‘by way of a gift’ without clarifying whether this is a part of the portion of the inheritance or is in addition to it, then a question that frequently arises is whether this constitutes a preferential legacy or directions as to the partitioning of the estate (Section 2048 BGB). To avoid misunderstandings, it would be advisable to use the following wording, for example, in a will or contract of inheritance:
From an inheritance tax perspective, the legacy solution could constitute an advantage if the family home will continue to be used by the spouse for their own residential purposes. Under Section 13(1) no. 4b ErbStG, in this case, the acquisition would be fully tax-exempt provided that
- the spouse actually moves into the house within six months after the succession event
- and remains living there for at least ten years (Section 13(1) no. 4b sentence 5 ErbStG).
It is irrelevant here whether the acquisition takes place via the designation of an heir or by way of a legacy, provided that it is an acquisition due to death (Section 13(1) no. 1 ErbStG). According to the case law of the Federal Fiscal Court (Bundesfinanzhof, BFH), a transfer by way of a legacy would also be sufficient for the tax exemption to apply (BFH, ruling of 11.7.2019, case reference: II R 38/16).
3. Selective partitioning of the inheritance
Within the framework of the partitioning of the inheritance, the heirs are free to divide up the estate amongst themselves via an agreement (Section 2042 BGB). In doing so, they can specifically agree that the family home will be assigned to the surviving spouse, even if they had not been entered into the land register as the sole owner.
From an inheritance tax perspective, it is crucial that the assignment does not take place as a legal transaction (e.g., purchase or gifting), but rather for the purpose of fulfilling a portion of the inheritance. The fiscal administration and the BFH do not view the assignment of the family home to the spouse as a taxable transfer of interests if this is attributable to a portion of the inheritance or a legacy (cf. Ministry of Finance circular of 11.12.2015, German Federal Tax Gazette [Bundessteuerblatt, BStBl.] I 2015 p. 1043, margin no. 2.1). In this case, the tax-exemption under Section 13(1) no. 4c ErbStG likewise applies, provided that the spouse moves into the family home within six months after the succession event. The privileged tax treatment here would also apply if the house had originally been jointly acquired and is only transferred solely to a co-heir within the framework of the partitioning of the estate. Moreover, for legal protection it would be advisable to have the partitioning of the inheritance, including the land register transfer, certified by a notary.
While a legacy lends itself, in particular, to the selective assignment of specific assets with a simultaneous exemption from liability, by contrast, a partitioning of the inheritance opens up scope for the flexible distribution of the estate and can also be used subsequently to establish a tax-exempt acquisition.
4. Actual equalisation of accrued gains
In the event of a divorce, the actual equalisation of accrued gains is always calculated, however, when a spouse passes away this can also be the case if Section 1371(2) BGB applies. Consequently, if the surviving spouse realises that an actual equalisation of accrued gains will yield more than an increase in the portion of the inheritance then they can
- disclaim the inheritance (Section 1942 BGB) and
- ask for an actual equalisation of accrued gains pursuant to Section 1378 BGB
In that case, the surviving spouse would not get a flat-rate portion of the inheritance, but instead a real equalisation claim in respect of accrued gains. Furthermore, the spouse can still claim the so-called “small compulsory portion”.
Example: Here, in the case of the initial example in Part 1, the child would become the sole heir and, after deducting the claim for the equalisation of accrued gains (€ 700k), would inherit € 2,800k. He would assume the testator’s position of a debtor (Sector 1967 BGB) and would have to satisfy the mother’s claim for a payment in the amount of € 700k from the accrued gains. Furthermore, the wife could claim her compulsory portion in the amount of 1/8 (½ of ¼) of € 2,800k = € 350k. She would thus have a claim for a total of € 1,050k. In this example, disclaiming the inheritance would not be advantageous for the wife.
If the surviving spouse disclaims the inheritance and asks for the actual equalisation of accrued gains (Section 1378 BGB) then, apart from a “small compulsory portion”, they would not get a share of the estate, but rather just a contractual claim against the estate. This means that this would not be an acquisition due to death within the meaning of Section 3 ErbStG and, in this respect, the claim would thus not be taxable and, therefore, not subject to inheritance tax.
Excursus - An unspecified gift due to the investment in a building owned by a third party?
One issue could be that the wife had invested in a building that, under civil law, had belonged solely to the husband. Whether or not this constitutes a gift between spouses is the subject of legal dispute. The Federal Court of Justice (ruling of 27.5.2003, case reference: X ZR 28/02) generally assumes that where the goal of a life-long partnership is pursued (e.g., joint property for married life, no intention to make a repayment claim) then this cannot be considered to be a gift within the meaning of Section 516 BGB. Rather, this then constitutes an “unspecified gift between spouses”, thus a voluntary, purposeful asset transfer within the framework of the marital partnership.
Claims for repayment (for instance, via Section 313 BGB) may only be considered in the case of a divorce - but not in the case of death. The wife thus contributes financially to add value to her husband’s assets - without a guaranteed repayment claim. In comparable cases, prior to the construction of the building, equalisation claims can be regulated via contractual arrangements.
